New Challenges Facing the Climate Regime

New Challenges Facing the Climate Regime

Jaime de Melo, Scientific Director, Scientific Director at Ferdi, Professor Emeritus at the University of Geneva, CEPR and Geneva Business School.

Marrakech, November 11, 2016

The Paris Agreement (PA), now a Treaty since November 4, is already in jeopardy as rumours are spreading that the US might reduce its effort at climate-change-averting measures and its contributions to UN activities, perhaps pull out of the PA, rumours that could lead to a reduction in efforts by China and others. The PA is really the first important step taken to limit temperature increase if pledges to 2030 become far more ambitious. As raised by the contributors to the e-book “Towards a Workable and Effective Climate Regime”, to be effective, this ‘bottom-up’ agreement must fulfil two conditions that the science (see De Conto and Pollard (2016) new estimates on the sea level rise by the end of the century) and the results from the US presidential elections are putting in jeopardy. First, the Agreement has to provide incentives for states to limit their emissions beyond what is in their self-interest for the sake of their collective interests. This is a huge challenge. But an even greater one is that the Agreement must be perceived as fair by the poorer countries that have contributed the least to climate change and are projected to suffer the most. This is because the poor are located in areas most exposed to climate risks because these areas are the only ones they can afford. The poor are the least resilient to climate shocks. They need financial support to adapt.

Slow progress at risk of stalling

Because the intensity of potential damage from climate change is dynamic (i.e. depends on the stock of CO2 emissions) the probability of damage is revised upwards through time. Hence the need to act now. Under optimistic assumptions (i.e. that damages are only proportional to the stock of CO2 emissions), in the absence of carbon capture, to stabilize emissions by the end of the century to reach the +2°C since the onset of industrialization, had emissions started falling at a constant rate in 2015 to reach zero net emissions by 2100, emissions would have had to fall at the rate of 4.4% a year. Starting in 2020, the rate climbs to 6.3% and if we were to procrastinate further until 2030, the annual rate would have to be 25.5% year (a rate unreachable short of geo-engineering).

As reviewed in a paper presented in Marrakech this week, a year on since the PA was signed, states have only inched towards providing the incentives that might raise sufficiently research funding (the estimate is an increase by a factor of 20 from current levels) to generate the ‘disruptive’ rather than ‘evolutionary’ innovations needed to decarbonize our economies. The recent agreement on curbing aviation emissions and theHFCamendment to the Montreal Protocol will both contribute to reducing the growth of GHG emissions and will hopefully be ‘start and strengthen’ initiatives. But these initiatives are in areas with the highest growth rates of GHGs (above 10% per year recently) and they will only come into effect in 2020 and 2024 (or 2028).

Civil society at large is moving ahead. Cities (the ‘C40’ initiative), the Carbon Pledge launched in 2014 by which major emitters commit to measuring and publicly disclosing the carbon footprint of their investments on an annual basis, and the Carbon Asset Risk movement initiative, a private-sector led carbon divestment movement are positive signs. So is the Climate Disclosure Task Force that is to deliver effective disclosure by those companies that produce or emit carbon. These are all signs that ‘private authority’ may be taking the lead.

These initiatives reflect the growing apprehension that business leaders and the public are apprehensive about the future. Along with the process of assessment and review under discussion at Marrakech this week, these initiatives create opportunities for ‘naming and shaming’ (the only incentive instrument to apply to sovereign states that have pledged to pursue domestic mitigation measures, with the aim of achieving the objectives of their NDCs’ which, as noted by Bodansky, is not a legal obligation). However, since the US Presidential election results, this gathering momentum will now slow requiring stronger action tomorrow. As an example, since the 1980s the number of registered weather-related loss events has tripled and inflation-adjusted insurance losses from these events have increased from an annual average of around $10bn in the 1980s to around $50bn over the past decade.

The uneven burden of damages calls for financial support to developing countries

Above all, the Agreement has to be perceived as fair and it is here that a retrenchment will be most costly for all. Figure 1 shows CO2 emissions by region and figure 2 projects damages in 2050, also by region.

In figure 1, total emissions in Gt are indicated in the bubble, the size of each bubble being proportional to that region’s share in total emissions. Regions above (below) the 45° line have above (below) average per capita emission intensities. While net per capita emissions of all GHGs (including methane and deforestation) are to converge to zero to arrest global warming, in a first step convergence in per capita CO2 emissions (here to 7t/capita) is a plausible benchmark of the required intensity of adjustment across countries and regions over the next decades. China is the heaviest emitter followed by the US and Europe and Central Asia while Sub-Saharan Africa (SSA—henceforth Africa)—with a population share equal to that of Europe and Central Asia) contributes about 10 percent on a per capita basis.

Figure 2: Projected Damages from Climate Change in 2050

Compare now the projected damages for 2050 in figure 2 under the assumption of no migration with damages from extreme temperature measured by the predicted number of days per year outside the 90th. percentile of the temperature distribution. This time, the bubbles are proportional to regional population shares, the 45° degree line again indicating whether regions are predicted to get damages greater (i.e. above the line) or lesser (below the line) than population shares. It is clear that higher damages are predicted to occur in the most populous regions. Three remarks are in order. First, if the UN population growth projections are approximately accurate, the redistribution of population across regions (in the absence of migration) will be strong before the end of the century. Second, even if income per capita convergence continues, SSA and South Asia, both in the low latitude regions (~25°N-25°S), will bear the brunt of climate change. Third, in the absence of successful adaptation, migratory pressures towards regions with a more favourable climate and low population densities will be intense and conflicts will arise. Seas and walls will not suffice to separate the rich from the poor.

Financial Transfer and Climate finance.

Financial transfers to low-income countries for adaptation and mitigation are the necessary glue to keep the Agreement on track as the damages will continue to fall disproportionately on the poorest. So far, annual estimates are three or more times the annual ($100 billion) pledge made in 2009-estimates that will be revised upwards as damages increase because of procrastination. Rich nations promised a yearly Green Climate Fund (GCF) of $10 billion, including $3 billion from the US, of which $500 million have been made available by President Obama but that President-elect Trump has vowed to stop during his election campaign.

According to the Climate Policy Initiative, $391 billion were invested in climate finance in 2014, less than the estimated $490 billion fuel subsidies for consumption and only about 10% was transferred to developing countries. The continued subsidies to fossil-fuel based activities continue to be the major impediment to a shift of resources towards alternative sources of energy. The capital is available but uncertainties (about the price of carbon, regulatory standards, support policies for renewables) have slowed the uptake of alternative sources of finance and these uncertainties are likely to increase.

Additional investments required to achieve the 2°C target are estimated at about 0.75% of world GDP in 2013(i.e. $0.6 trillion a year up until 2030) while a 2°C consistent carbon tax in OECD economies would generate up to 1.3 trillion USD per year of revenues 2030, equivalent to 2.1% of OECD aggregate GDP in 2013. Adequate carbon pricing, always advocated by economists on efficiency grounds, may be sufficient to address the climate change problem, but little progress has been made so far (in 2015 40 national and 20 sub-national jurisdictions have a carbon tax or are engaged in cap-and-trade, covering about covering 12% of annual global emissions for an average price of carbon $7Gt/CO2 t). The outlook for carbon pricing looks grim and should this happen outside the US, the resulting carbon leakage will put strains on the global trading system.

If a widespread tax on carbon remains an essential ingredient of any workable long-run climate regime, in the meantime, other measures to transfer resources to low-income countries remain elusive. Transfers that avoid the legislative process like linkage across carbon markets in different jurisdictions and other ‘clever’ but less-efficient measures will have to be considered. For instance, a cap-and-trade mechanism along the lines of the Clean Development Mechanism of the Kyoto Protocol is one option but, to be effective, it should include the large emitters. Another is offsets from sectoral treaties like the HFC amendment to the Montreal Protocol or the recent agreement on curbing emissions from aviation (or shipping in the near future) that could be used to arrest deforestation, an activity that, at least holds the promise of meeting the conditions of being verifiable. Because of these growing uncertainties, it remains that all avenues to effect transfers of the magnitude estimated will have to be explored to hold together the promises of the Paris Agreement.